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Analyzing the Future of Compensation and Benefits

An area ripe for disruption is salary surveys: The day is not far where the likes of LinkedIn can supply data, both to individuals and organizations, on salaries worldwide. Blockchain can also be used in this respect to ensure the data is accurate.

The field of compensation and benefits (C&B) is on the verge of big changes. Of the human resources functions, it is one that has received little attention from HR technology and analytics tools. But this situation is due to change soon.

For one, there are enough analytics out there to start looking into meaty questions that have plagued the field for years, such as, do incentives work? If so, which ones deliver more bang for the buck? STI? Higher pay mix? Team vs. individual incentives? Performance shares vs. stock options? These are questions for which every seasoned C&B professional has an answer, but on which analytics can provide an evidence-based response.

Managing Expectations

Perhaps one of the biggest difficulties C&B professionals face is the changing expectations of employees, given the mostly stagnant expectations of shareholders. How to balance these two certainly qualifies as the “horns of a dilemma!” However, the answer lies in applying analytics to employee preferences that, at the same time, either produce higher performance or reduce overall cost at the same perceived value.

Let me illustrate these two possibilities: On the one hand, assume employees prefer a lower-risk pay mix (say 90/10) over a higher-risk pay mix (say 75/25). If the company, through analytics, can demonstrate that this new pay package actually reduces turnover — and the cost associated with it, with no material loss of performance — then it can build a business case to make this change. The second example would be to use conjoint analysis to explore which combination of benefits has highest perceived value at a given cost point. Or conversely, which combination of benefits can provide the same current perceived value at the lowest cost.

A winning rewards strategy that fits all cases does not exist: Which strategy a company can deploy will depend on a number of factors, including business strategy, the type of people the company wishes to attract, company culture, stage of business growth, strength of competitors, the company’s employee value proposition, and the state of the labor market, among others. A well-designed strategy can improve results, whereas a poorly designed strategy can actually cause the company to lose value, as we have seen in recently publicized cases where incentive systems led to improper behaviors.

Here Comes Disruption

An area ripe for disruption is salary surveys: The day is not far where the likes of LinkedIn can supply data, both to individuals and  organizations, on salaries worldwide. Blockchain can also be used in this respect to ensure the data is accurate.

One more new practice that is already doable is flex-pay, which can be patterned after flex-benefits. For instance, some employees may prefer a lower pay mix (with lower upside) than others. This could be used to implement “pay for retention” or “pay for development,” rather  than “pay for performance.” Companies could choose to go this route for at least some employees.

Another aspect that is causing some companies to rethink their compensation schemes is the preponderance of part-time employees and “gig” employees. So, how do they create pay programs that maintain the notion of pay equity?

All About the Benefits

With regard to benefits, wellness programs have been around for a while and have proven to be effective — and yet many companies have not implemented them. However, more interesting practices are likely to be just beyond the horizon, including the possibility of “benefits for performance” (e.g., additional leave or lower co-payments for high performers). But these innovations may not happen soon as benefits practitioners continue to look at cost-control as their primary objective. 

Perks, however, will continue to improve, in order to increase the employee experience and net promoter scores, both of which are used as a means to improve employee attraction and retention.

Progressive organizations understand that a personalized, agile, holistic rewards system is helpful to attract, motivate and develop talent. So why are so many companies falling short, even as they realize their rewards programs are outdated? This is a good question that deserves collective thought. One hypothesis is that C&B professionals have been very dogmatic about the notions surrounding pay-for-performance as the only model: 

  • Shareholders expect a return on the compensation investment;
  • Finance prefers costs to be variable, and thus likes the idea of higher variable pay;
  • Management pursues profitability as a KPI; and
  • HR often aids and abets these arguments by managing the cost side of the equation more than the revenue side when it comes to looking at ways to enhance productivity.

Curing Old Comp Theories

Many companies still base their compensation decisions on market practice. For instance, we use this data to answer such questions as “What is the market median for our competitors?” and “Should we match their pay mix?” And the constructs around agency theory and expectancy theory — that is to say, extrinsic motivation — have yet to change to a different mode of thinking (e.g., prospect theory) in the general HR community. Old loves die hard! It will take time for a few insightful companies to start using their data to analyze compensation packages and outcomes for the new models to debunk old paradigms, and for the rest of the world to notice and start changing. A case in point: Everyone knows companies such as AB InBev and Netflix pay top of market, and everyone knows they are incredibly successful in their business results. Yet few companies are willing to emulate these two. This will change in due course.

A Strategy, Reframed

There are, of course, challenges in reframing a total rewards strategy. Perhaps the biggest challenge stems from aligning the diverse views that are always present in any compensation strategy discussion. The first is the shareholder view: They are less concerned with the amount paid than with the return received. In other words, they are less concerned with internal equity and external competitiveness, and more with the performance part of the pay-for-performance model.

The second view is that of the market: There is a “price” for each type of employee and for the skills they bring. This is the external competitiveness model.

Then there is the HR view: The function needs to balance attraction with retention and motivation. Thus, market competitiveness serves to attract, but immediately attention turns to internal competitiveness to retain — and somewhere in the middle lies variable pay as a motivator, as long as it doesn’t affect the other two.

A difficult balancing act, indeed.

The fourth view is that of the company: Overall KPIs are usually measured in a rather unbalanced scorecard, where revenue growth and profitability dominate. If the pay package aims to increase productivity by driving revenue and profitability, all is well and good. But if HR cannot prove — not just imply but prove! — the link between higher pay and higher productivity, the company view will default to control of this cost as a means to seek productivity gains. 

Finally, we reach the view of the employees: To an employee, reaction to pay is often emotional, akin to thinking “The amount in my paycheck is the exact amount my company loves me!” which quickly devolves into “They love somebody else more!” or “That company loves their employees more than my company loves me!” This emotional reaction makes it hard for C&B teams to then discuss “facts” and “data.” How often has the argument “We pay at the 50th percentile and build our salary grades around the market data from our consulting vendors; you are paid within the salary band” really worked when trying to convince an employee that they are competitively paid? Balancing these differing views has, for years, been the most difficult part of the C&B job.

Exciting times are ahead for C&B professionals. They will need to have data and analytics to help usher their function into the future of work.

Fermin Diez, Ph.D., is the deputy CEO and group director, Human Capital and Organization Development Group, of the National Council of Social Service in Singapore.